By Francis Nyonzo.

The informal sector affects revenue collection; however, mobile money has the potential to change the story. Let’s see how Tanzania can effectively nudge the informal sector using mobile money. A nudge should include something like a hook to attract taxpayers, in simple terms, answering the question: what is in it for them (Tax payers)?

The nudges used in various studies are often repetitions of what is already happening, such as sending emails, SMS messages, or placing notices on businesses. However, nudging is not just about providing information. For reference, information about the harmfulness of alcohol or cigarettes has not necessarily decreased their consumption. Similarly, when taxes are collected without considering people’s behaviour, may end up creating unnecessary criminals.

Bringing the economics of crime into the discussion, the result of criminalizing issuing receipts may simply be losses for the government. There are costs associated with crime detection and reporting, police investigation, arrest and detention, and the prosecution process. In addition, prisons have costs for keeping inmates.

As Charles L. Ballard writes in his book Michigan’s Economic Future: A New Look, “Nobody enjoys paying taxes, myself included.” Yet he discusses the issue, nonetheless. What is needed is a way to increase revenue without creating criminals. This is where nudges come in.

Mobile money has the potential to help make Tanzania a cashless society. However, up to now, Tanzania is not as cashless as Kenyans, who also widely use mobile money.

Can the Youth Development Fund be used to Promote Mobile Payments?

According to the 2022 Tanzania Population and Housing Census, more than 76% of the population is under the age of 35. This means Tanzania have a large number of young people who are looking for capital to finance their business ideas. Some of them already run small businesses but may have limited access to finance.

On the other hand, the Youth Development Fund, which is currently administered by district councils, often does not reach the targeted beneficiaries. In some cases, the funds remain within the councils.

When the Youth Development Fund does not reach its intended beneficiaries, it does not mean that young people do not need the funds. I recommend a different route that could act as a nudge. Instead of district councils administering these funds directly, they could work in partnership with telecommunication companies.

Furthermore, the requirement of forming a group of five or more people should be relaxed. A person should be able to secure funds solely based on their mobile money transaction score (Transaction history) rather than being required to join a group. However, if young people voluntarily choose to form groups, that should still be allowed. In this way, group formation would be voluntary rather than a compulsory condition, as it is currently practiced.

This approach would support already established youth businesses. For these entrepreneurs to increase their mobile money scores, they would need to encourage their customers to pay using digital means. This would motivate business owners to prioritize traceable transactions through their Lipa Namba payment systems. Considering the fact that mobile money is positively related to government revenue it will be easy for the government to collect revenue from the informal sector. That is, this way, the digital means of payments will be promoted as the businesspeople will need good mobile money transaction history to secure more funds from the youth development fund.

At the same time, Lipa Namba services should be affordable and accessible to every businessperson. For example, in Kenya, even small and micro-business owners, such as those selling samosas or eggs, as well as Uber drivers, use payment tills to receive digital payments.

Kenyan Microbusiness person using till for Smokies, Samosas & Eggs

Photo by the Author, taken in the streets of Nairobi.

It should be noted that some financial institutions are already partnering with telecommunication companies. Therefore, there are already lessons on how this kind of collaboration can be implemented for district councils.

Challenges and Solutions

Recently, there has been a problem with identification, which has resulted in some people having their SIM cards registered under names that are not theirs. For example, a Financial Sector Deepening Trust Tanzania (FSDT) 2023 survey with 7,510 respondents found that 31.82% of respondents had SIM cards registered under someone else’s name, most of whom were women.

This problem could be addressed if obtaining an official identity is promoted as a pathway to financial inclusion. For instance, individuals could be reminded to obtain identification once they reach the legal age. Similar public reminders were used to encourage people to vote during the 2025 Tanzanian general election.

Another problem is that people are withdrawing money using Lipa Namba. Recently, this method has been used to avoid high cash-out costs. If a mobile money score were to be introduced, a similar problem might occur, with people attempting to artificially increase their scores in order to qualify for larger amounts from the Youth Development Fund. The same FSDT survey shows that 87.95% of respondents withdraw money using Lipa Namba, while the remaining percentage do not.

It is also important to note that there are different digital payment methods beyond Lipa Namba. I do not recommend splitting scores across different systems. Instead, there could be a service that allows a businessperson to register all the digital payment methods they use in their business so that their transaction scores are combined regardless of the service provider.

These are preliminary ideas that need to be evaluated through experimental research. While the proposal is somewhat complex, it could be very useful when attempting to nudge the informal sector at this time. I propose this type of nudge because many nudges used in previous studies simply involve reminders to taxpayers, which may not significantly alter people’s behaviour.